For decades, India’s trade posture was defined by caution. India walked away from the Regional Comprehensive Economic Partnership (RCEP) negotiations in 2019, citing domestic industry protection. The dominant discourse in India surrounding trade agreements was the belief that such agreements only widen India’s trade deficit.
However, in the last few years, Indian policy makers have adopted a calibrated approach towards trade agreements. Between January 2025 and early March 2026, India concluded or substantially advanced trade agreements with the UK, Oman, New Zealand, the EU and the United States. The India-EU Free Trade Agreement (FTA), signed in January 2026, brought together two economies representing roughly 25% of global GDP. The India-U.S. Bilateral Trade Agreement announced earlier this year would reduce U.S. tariffs on Indian goods from 50% to 18%. India is simultaneously in active negotiations with the Eurasian Economic Union, Chile, Peru, the Gulf Cooperation Council (GCC) and several other trade partners.
Understanding what is driving this shift and where it is headed is a strategic imperative for everyone interested in the Indian market.
China: Crisis, Calibration and Managed Dependency
One of the biggest factors that pushed Indian policymaking in this direction was the border crisis with China. India’s trade deficit with China reached a record of USD 112.6 billion in 2025-26, with imports rising 16% to USD 131.63 billion while exports were a fraction of that figure. Chinese raw materials, capital equipment and intermediates form the foundation for India’s electronics, pharmaceutical and automotive sectors. Full decoupling from China is untenable.
India faces this reality of economic dependence while also being aware of China’s strategic partnership with Pakistan, the border dispute and Beijing’s monopoly over rare earth supply chains.
To reconcile the two realities and to attain its interests, India had adopted a policy of managed dependency. This is a strategy, which involves building domestic capabilities through initiatives like the production linked incentive (PLI) scheme, diversifying intermediates and reducing vulnerabilities, while continuing trade with China at an operational level.
Another crucial shock for India was the imposition of tariffs and penalties by the United States, which exposed the structural limits to the personal diplomatic relationship between President Trump and Prime Minister Modi. India agreed to curtail Russian oil purchases in exchange for market access. New Delhi negotiated the price of strategic autonomy in trade currency this way.
The ongoing tensions at the Strait of Hormuz have further exposed India’s supply chain vulnerabilities. The International Energy Agency (IEA) characterized the disruption as the largest supply chain disruption in the history of the global oil market. India, which has a structured engagement with the Gulf countries, faces critical disruption on its fuel supply. Beyond oil and gas, commodity markets including aluminum, fertilizer and helium also suffered significant supply chain disruptions.
Emerging 4 Pillars of India’s Strategy
India’s strategy is emerging to be structured around four pillars that corporate and sovereign actors must keep in mind as a baseline.
The first pillar is the diversification doctrine. India is rapidly building a structure of bilateral dependencies to thwart disruptions—like tariff wars, rare earth consolidation and conflicts—in the long run. The Hormuz crisis will contribute to solidifying this doctrine even further. India has formally launched negotiations with the GCC, keeping in mind its energy security and the talks with Chile and Peru are aimed at securing critical minerals supply chain.
The second pillar includes policy reforms to boost domestic manufacturing capabilities and reduce external dependencies. Among various other policies, the PLI scheme extends to 14 sectors as industrial sovereignty policy. The policy provides for financial rewards to both domestic and foreign companies based on their incremental sales from the products manufactured within India. It is a serious attempt to build domestic manufacturing depth. Mobile phone production is a good example to attest the merits of this scheme; India is now the second largest smartphone exporter. The next targets are semiconductors, green energy and specialty chemicals.
The third pillar includes investment screening modernisation. India is planning to tighten its investment screening architecture amid geopolitical fragmentation. After the amendment of Press Note 3, which ended the automatic route of Chinese capital in India, business should still anticipate closer scrutiny of Chinese capital inflows and technology transfers.
The fourth pillar is India’s preference for quality FTAs. As stated above, earlier FTAs—particularly the one with Association of Southeast Asian Nations (ASEAN)—have only led to widen India’s trade deficit. New trade agreements are being designed with stronger frameworks for digital trade, mobility and rules-of-origin, among other things, to advance India’s advantages in sectors like IT, pharma and services.
Emerging Opportunities and Realities
It is important to keep in mind that supply chain diversification is a long-term plan, which will take time. The India-U.S. trade deal will not trigger a diversification revolution, but it will guide entities looking for alternatives to China-dependent supply chains. Bilateral trade with the United States and EU is projected to exceed USD 350 billion by 2030. Sectors like electronics, auto components, defence manufacturing and pharmaceutical intermediates are some sectors where diversification investment will concentrate.
The Indo-China trade paradox will intensify for a while rather than resolve and this is the operating reality for India. Businesses in India will continue to source from China while being required to demonstrate supply chain diversification to western clients and to comply with tightening Indian investment scrutiny for Chinese capital.
Geopolitical push and pulls will remain permanent variables, and the assumption that commerce and conflict occupy separate lanes is obsolete. For corporate and sovereign actors, the practical implication is straightforward: India is a strategic variable with a huge market and the window, for the first mover positioning in the post-FTA architecture, is open.
